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Frequently Asked Questions

Indemnity Period

A client has a claim and has a 24 month Indemnity Period applicable to their Policy. They are soon approaching the policy’s renewal date. What should be done with their BI sum insured as their income is not back to where it was pre-loss?

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They must forecast what is expected to happen over the next 3 years i.e. the insurance year and the 2 year Indemnity Period. If in doubt leave it higher and then adjust it at the end of the year.

Do some underwriters delay in making a decision (in a claim) to ‘use up’ more of the Indemnity Period? Thus likely reducing the amount they pay. Is this an issue in the market?

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Refer to the principle of utmost good faith in Sections 12, 13 and 14 of the Insurance Contracts Act.

This would be a breach of contract and lead to damages such as interest under the Insurance Contracts Act from the time they reasonably withheld payment. If it was deliberate it could lead to a bad faith claim. In general Insurers will take reasonable care to grant Indemnity to the Insured in a timely manner and will ensure the Policy responds appropriately.

If the Indemnity Period is 24 months, should we not just be doubling gross profit?

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That is a simplistic view. You need to trend for the policy year, and then both years. Each of the 3 years could be different

If there is a 12 month Indemnity Period would it not start from the inception date of the policy?

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Indemnity Period refers to the cover available from the date of the loss not the policy inception.

The loss could occur late in the policy period i.e. the last day and then run for say the next 12 months being the Indemnity Period.

If you have an Indemnity Period of 12 months, and you are covered for professional fees of $50k, and that value can pay for services beyond 12 months is that OK or once the 12 month period is completed does the professional service have to stop?

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Claims preparation fees are not subject to Indemnity Period and they can be incurred and claimed outsider the Indemnity Period. Usually Business Interruption claims are finalised after the Indemnity Period and once the financial data is available.

In a case where natural disaster occurs e.g. QLD (flood, cyclones etc.) there may be a high volume of claims that insurers may not being able to accommodate.

What happens to the insured’s claim such as Indemnity Period, delays in reinstatement etc.? Does the Indemnity Period get extended and what other options are available?

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No, but that is where an effective claims preparer can advise the client on what to do and assist the Insured with strategies to mitigate the loss. MSM can assist with finding tradespeople, other resources as well as strategic advice.

Is there a big difference in premium from 12 months to 24 months Indemnity Period?

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Usually the Sum Insured multiplies by the change in the Indemnity Period although differing growth trend rates also have an impact. It is a question of negotiating a rate with the Underwriter.

Is 24 months the longest Indemnity Period available?

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No. You can arrange a cover for longer than 24 months. Most insurers will offer 36 months. Beyond that would need to be negotiated with the Insurer.

Is it appropriate to only declare 6 months Gross Profit on a 6 month Indemnity Period if an Insurer agrees to it (therefore Average won’t be applied) or are there other issues with this approach?

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The amount of gross profit to be declared for Indemnity Periods less than 12 months should still always be declared for 12 months.

When the period is higher, the amount should be proportionately increased to reflect the Indemnity Period selected.

You would need specific agreement with the Insurer and coinsurance deleted to declare for only the 6 months. You must be able to demonstrate the Insurer’s agreement otherwise you may face a non-disclosure issue and may have an issue if the position is tested.

What is the minimum time period (Indemnity Period) we should be asking for Business Interruption cover? Typically it’s 12 months, but others say 18 months to 24 months?

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The minimum period should be 12 months. The length of the Indemnity Period depends on a number of factors such as occupation, locations, rebuild times, lead times on plant and machinery and of course the time to get back to normal trading.

Where do we stand when there is a coronial enquiry which prohibits access to site which takes up most of the Indemnity Period and then leaves little or no time for any rebuild time?

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It dependsĀ on whether there is a link between the Incident and the Policy. If it is because of the damage the Policy may respond but if it is because of a death or injury then there may be no nexus between the two.

Refer to the definition of proximate cause i.e. is there an intervening cause which is the driver of the claim.

Who decides when the Business returns to normal operation for the purposes of determining the Period of Loss? Also after say an excess of 2 days how is the insured indemnified (paid out), Weekly, Monthly etc.

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The Period of Loss depends on whether or not the Insured is able to generate the same of level of business that we would have been able to achieve had it not been for the Incident. In most cases, this depends on the growth trend agreed with the Loss Adjuster and the actual revenue compared to the standard revenue.

When claim payments are made depends upon the Policy type and the nature of the claim if it is a weekly cover (as suggested by the 2 day excess), then it is often paid weekly. Otherwise progress payments are agreed with the Loss Adjuster and facilitated by claim submissions.


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